Greek debt talks break down

Some German lawmakers see Greek exit as manageable

By

WilliamL. Watts

FRANKFURT (MarketWatch) — Talks between private creditors and Greece on a voluntary restructuring of government debt appeared to break down Friday, with negotiators representing the private sector citing the lack of a “constructive, consolidated response by all parties.”

A deal on a proposed 50% writedown on the value of Greek debt held by the private sector is a prerequisite for Athens to receive further rescue funds from the International Monetary Fund and the European Union secured as part of a second bailout agreement reached last October.

Alongside reports that ratings firm Standard & Poor’s is set to downgrade the ratings of several euro-zone countries, including triple-A-rated France, the developments sent the euro skidding to a 16-month low versus the dollar.

“Under the circumstances, discussions with Greece and the official sector are paused for reflection on the benefits of a voluntary approach,” said Charles Dallara, head of the Institute for International Finance and Jean Lemierre of the Institute of International Finance, a global lobbying group representing private bondholders in the discussions.

“We very much hope, however, that Greece, with the support of the euro area, will be in a position to reengage constructively with the private sector with a view to finalizing a mutually acceptable agreement on a voluntary debt exchange consistent with the [October] agreement, in the best interest of both Greece and the euro area,” they said.

Dallara and Lemierre held talks Thursday and Friday with Greek Prime Minister Lucas Papademos and Finance Minister Evangelos Venizelos. Earlier, a government official had told reporters that talks would likely resume on Wednesday, news reports said. Dallara and Lemierre offered no date for a resumption of talks.

European leaders in October agreed to a second bailout plan for Greece but required private bondholders to bear part of the burden by agreeing to a restructuring that would write down the value of their Greek debt holdings by half. The restructuring is intended to cut Greece’s debt load by 100 billion euros ($127.7 billion).

The lack of agreement also triggers fears that Greece could move to impose a forced restructuring on bondholders, creating an official “credit event” that would require banks and other institutions to pay out on credit default swaps, derivatives used to insure against debt nonpayment,” said Michael Hewson, analyst at CMC Markets in London.

That scenario raises the specter of a potential disorderly default that could spark contagion across the region, analysts have warned.

German Chancellor Angela Merkel, speaking alongside French President Nicolas Sarkozy, made clear earlier this week that Greece won’t get its next tranche of rescue funding, which is set for release in March, unless there is a deal.

“It is essential in order to finalize the voluntary PSI [private-sector involvement] agreement that support be given by all official parties in the days ahead,” said Charles Dallara and Jean Lemierre, co-chairs of the Steering Committee of the Private Creditor-Investor Committee for Greece, in a statement Thursday.

“As Chancellor Merkel and President Sarkozy stressed in their Berlin press conference earlier this week, it is important that Greece reach agreement with the private sector on a voluntary debt exchange as soon as possible,” they said.

A government spokesman said Greece is planning legislation that could force reluctant bond holders to participate in an involuntary debt exchange if a majority of private creditors agree to a voluntary plan, The Wall Street Journal reported.

Greece’s so-called troika of international lenders — the European Union, International Monetary Fund and the European Central Bank — previously delayed the release of Greece’s next aid tranche to March. Under the original schedule, Greece would have been able to meet a 14 billion euro ($17.9 billion) bond redemption in March after receiving a total of €15 billion of aid payments in two separate tranches, noted Gustavo Bagattini, European economist at RBC Capital Markets.

“The delay would mean this would no longer be feasible, meaning agreements on the PSI and the second bailout are required to avoid a default on the repayment,” he said.

Meanwhile, high-profile lawmakers from Merkel’s Christian Democratic Union party have stepped up pressure on Athens by describing the possibility of Greece’s exit from the shared currency as manageable.

Measures put in place since 2010 to fight the spread of the crisis make contagion less likely in the event of a Greek euro exit, Michael Meister and Michael Fuchs, who are both deputy parliamentary caucus leaders in the CDU, told Bloomberg. Merkel and Sarkozy, in contrast, have insisted no country will exit the shared currency.

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